Dawn News

Economic turmoil in Iran

THE fall in the value of the Iranian rial from 24,000 to the dollar to 37,500 in two days’ trading last week was a dramatic reminder of the economic difficulties that the West-imposed sanctions have caused for an economy which even otherwise was not doing too well.

Both President Mahmoud Ahmadinejad and his opponents, however, played down the role of the sanctions in the fall of the rial’s value.

President Ahmadinejad attributed 20 per cent of the currency turmoil to the sanctions while the balance was owed to manipulation by “22 people in three separate circles” within the country, who with “one phone call”, as reported, “manipulate foreign exchange trades in Iran”. (This appears reminiscent of President Ayub Khan’s days in Pakistan when the infamous 22 families were held responsible for the economic ills of the country and particularly the skewed income distribution of that era.)

The Iranian president’s opponents also seem to agree that sanctions have played a small part in the currency crisis. Majlis Speaker Ali Larijani offered the following as his explanation for the crisis: 80 per cent owed to Ahmadinejad’s policies and 20 per cent to sanctions.

There is no doubt that economic mismanagement has exacerbated Iran’s current economic difficulties but there is also no doubt, at least in my mind, that the loss of almost 50 per cent of its oil revenues and the extra amounts it has had to pay for its supplies from abroad have been the main factor in eroding confidence in the rial.

For the Iranian ruling class, it is necessary, however, to argue that the costs imposed by sanctions are bearable as the cost of preserving the nuclear programme. Ironically, even the Americans are arguing that Iran’s current plight is owed to economic mismanagement because they do not wish to bear the onus of creating hardships for the common man in Iran.

But trenchant criticism from Ali Larijani — his standing in the Iranian political system notwithstanding — was comparatively less important for Ahmadinejad, than the fact that in every mosque in the country, the sermons have been almost uniformly critical of Ahmadinejad’s erratic economic policies and have held him responsible for the current crisis.

This is a clear indication that such support as Ahmadinejad may have enjoyed from the Supreme Leader has evaporated. In parliament too, his standing is, to say the least, in steep decline.

Parliament appears to have decided not to implement the second phase of the economic reforms that Ahmadinejad had introduced in 2010 and which were designed to correct the distortions introduced in the economy by heavy subsidies on essential products and below-cost supply of fuel.

There are two facets to the current crisis that need to be examined. First Ahmadinejad’s presidential term is set to expire in June 2013 when there will be fresh elections and he will not be eligible to run.

The current crisis, however, has resulted in demands both on the street and in parliament for the president to quit immediately. Such demands, made quite often in the recent past as disillusionment with his populist policies grew, may have more traction now given the current crisis and the apparent lack of any support from the Supreme Leader.

Ahmadinejad, however, has one great advantage — a strong following among the poor for whom his subsidies have been an essential lifeline. Many believe people would come out into the streets if parliament chose to try and oust him even if it has, in this endeavour, the support of the Supreme Leader. It is also far from certain that the Supreme Leader will offer support for such a move at a time when Iran is facing enormous pressure from abroad and unrest at home.

The second facet is to gauge whether the Iranian economy with its present leadership and its present policies can weather the storm and continue to limp along. Is there a real fear of the collapse of the Iranian economy?

The truth, as explained here, is that despite sanctions and the serious effects they have had, the Iranian economy should be able to get by with some more official controls being brought into play to control the outflow of the hard currency that Iran continues to earn from its much reduced but still substantial oil exports.

Last year, according to the IMF, Iran’s foreign exchange reserves stood at $106bn and Iranian exports, primarily oil and gas, amounted to $101bn while its imports of goods amounted to $50bn.

This year export earnings are estimated at $55bn-$60bn as against imports of around $55bn leaving the current account roughly in balance. Of its foreign exchange reserves some $30bn are in banks abroad and are subject to sanctions, but the rest would be available for an economy, which has a very small domestic and foreign debt (seven per cent of GDP) and can subsist if not flourish despite the fall in oil revenues.

Additionally, it seems that despite the sanctions Iran was able to increase its oil exports from less than 0.9 million barrels a day in July to 1.2 million barrels a day in August.

Already it has been announced that foreign exchange will continue to be provided at heavily subsidised rates for imports of essentials — food and medicine — and at a less heavily subsidised rate for industrial raw material and other essentials, the list of which is being expanded, for the economy.

What will be most seriously affected will be the demands of the upper middle class for foreign exchange for the tuition of children studying abroad, for holidays abroad or for imports of luxury goods and it will be this class which will be most resentful of the effects of the sanctions imposed by the West.

The writer is a former foreign secretary.

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Comments (9) Closed

Oct 11, 2012 11:47am
All in the name of Islam.
Rashid Sultan
Oct 10, 2012 11:08am
One may pay significantly more Rials for US dollars but the rial in the pocket of a iran domicile is still worth a Rial except when purchasing non essential imported goods & services. Prices of Petrol / diesel / gas, housing, essential food stuff, clothing, etc that are locally produced and local services such as public transport, leisure activities are stable and won't effect majority of Iranians.
Oct 10, 2012 03:10pm
A bomb at what cost - Iran is following Pakistan into the art of "eating grass". sacrificing the present generation for a future with a bomb. Will history be kind to him?
Cyrus Howell
Oct 10, 2012 06:16am
With the news that Iran is about one year away from building a nuclear weapon, assume their currency the rial will continue to lose value.
Oct 10, 2012 06:13am
this will effect Pak currency and the illegal imports from Iran will be increased.Specially those who deal in Iranian petrol smuggling, will earn the windfall gain
Azhar Naqvi
Oct 10, 2012 05:52am
A good analysis of the present economic situation of Iran.
Oct 10, 2012 07:40pm
Sorry, Rashid. You are showing your utter ignorance of trade and economic interaction in today's world. An economy like Iran's is totally dependent upon the imoprts from the rest of the world and that is where the rial is becomong worthless. Unless the Iranians want to go back to the days of donkeys as their transportation system, they will have to conform to the world norms of behavior or else slowly go back to the 7th century panacea that the mullahs over ther are pining for.
Oct 10, 2012 05:32pm
The king is still in his palace while the people on streets suffer.
Arash Irandoost
Oct 10, 2012 04:37am
Ahmadinejad can play down the impact of sanctions all he wants. Fact is sanctions are having an impact. Sanctions target IRGC apparatus that controls 80% of Iran's economy. But sanctions short of an oil embargo are meaningless, if the West truly wants to bring Iran to the negotiations table.